Facebook’s Baffling Stock Spike Could Be Explained This Week

Suddenly, Facebook is popular with Wall Street again, and it’s not clear why. Why did the social network’s stock close last week on a six-month high? Why has there been a sudden rash of Facebook upgrades? How does a stock shoot up 9 percent in three days — and 22 percent in two weeks! -– despite a dearth of any real news about company profits, revenues, or products, to say nothing of an actual earnings report?

No one knows, or at least no one’s saying. Facebook last reported quarterly financial performance Oct. 9 and won’t do so again until Jan. 30. Its stock closed Friday at $31.72, up from a low of $17.55 in September.

Adding to the mystery, the social network cryptically invited the press to an event this coming Tuesday to “see what we’re building.” Is Facebook building a phone? A new timeline? A second nacho café on its Menlo Park campus? Unknown.

The most plausible explanation for the spike I’ve heard comes from Baird analyst Colin Sebastian, who tells me investors are working themselves into a hopeful lather. Here’s Sebastian’s more polite phrasing:

There is growing anticipation of strong Q4 results, in particular relative to other online advertising companies. Secondly, [there is] speculation over the press event next week. Lastly, from a technical perspective the stock looks attractive…. Facebook continues to make progress with the transition to mobile, make improvements to the user interface, and bring more value to advertisers.

Sebastian is certainly right about people getting their hopes up about Facebook’s financial performance. Facebook has entered a second honeymoon with Wall Street bankers after a miserable fallow period following its bungled IPO. The turnaround began in October when Facebook reported better than expected quarterly results in which it announced it had reversed a deceleration in revenue growth and announced mobile ads had grown to 14 percent of revenues from essentially 0 the prior quarter. The stock then began a rally that hasn’t stopped since and which now seems likely to return the company, at long last, to the $38-per-share stock price at which it went public last summer.

Facebook even maintained its momentum despite the end of lockup periods on stock held by employees and investors; in November alone, the “float” of tradable stock nearly doubled as lockups expired. “Given that FB shares have been up meaningfully since the expiration of the mid-November lock-up, this suggests the issue is now largely played out and there appears to be strong demand to absorb this supply,” Sterne Agee analyst Arvind Bhatia wrote last week.

The question now is whether Facebook can actually meet expectations that appear to have grown sky-high again. The first test will be the Jan. 15 mystery press event. The second will be Facebook’s Jan. 30 quarterly earnings release.

To support its suddenly valuable stock, Facebook will need to show off a new product with real moneymaking potential on the first date and then post accelerating revenue growth and big mobile ad revenue increases on the second date. If it fails to do either, Facebook could find itself suddenly in the Wall Street doghouse again.

Then again, maybe Facebook finally has its fiscal ducks in a row for once. At least two Wall Street analysts encouraged me to check back in with them next week — the week of the mystery press event — for further color on why Facebook shares have spiked lately. Maybe they know something the rest of us don’t.